An age of entitlement? Not quite

If you exclude the aged pension, Australia has fewer people now on welfare than 10 years ago.

AAP: Alan Porritt

Treasurer Joe Hockey plans to usher in the "age of personal responsibility", but any golden welfare age Australia may have enjoyed was over a while ago, writes Greg Jericho.

As Parliament gears up for the start of the year, 2014 looks to be politically packed. But among the three state elections, possibly a re-run senate election in Western Australia, a G20 summit and various reports by various commissions, as ever the budget hangs over it all.

From the way Joe Hockey has been talking - fresh off a chest-puffing win on SPC Ardmona - the budget is going to be full of deep cuts. It seems it will be the budget that unveils the end of the "age of entitlement", and begins the "age of personal responsibility".

Before pondering the budget, it is good to remember that if you exclude the aged pension, Australia has fewer people now on welfare than 10 years ago. Indeed, the only years in the past decade the number of non-aged pension welfare recipients went up was in 2009 and 2010, due not surprisingly to an increase in the number of people on Newstart as the unemployment rate rose sharply during the GFC.

So the age of entitlement (if there ever was one) ended a while back in Australia, and if you hear any politician utter such a line, be aware they are feeding you manure and calling it chocolate.

In the mid-year fiscal and economic outlook (MYEFO), released the week after Parliament rose in December, the budget deficit was estimated at $46.989 billion, compared to the $30.14 billion estimated in the pre-election fiscal and economic outlook (PEFO).

Now, $10.3 billion of that extra deficit comes from decisions taken by the Abbott Government - such as the $8.8 billion to the RBA to lift its reserves.

You can argue about the need for that, but it is worth noting that while the $8.8 billion has yet to be provided (the legislation hasn't been introduced, let alone passed, so it clearly wasn't that much of an emergency), since the September election the RBA's reserves have gone from $52.97 billion to $59.485 billion. This $6.5 billion improvement has occurred primarily due to the value of our dollar falling. In November and December alone the RBA's position improved $2.3 billion.

But such expenditure (needed or not) aside, the other $6.6 billion in the deficit increase occurred due to changes in the projections of the economy.

First off, the MYEFO revised down the expected nominal GDP growth for 2013-14 from 3.75 per cent to 3.5 per cent. They did not, however, change the prediction for "real GDP growth". This is important because it suggests they believe inflation will decline, as nominal GDP is in essence real GDP plus inflation.

What we observe is that the MYEFO is pretty depressing in its outlook. Real GDP growth stays flat, and nominal GDP growth, rather than continuing on a slight uptick, is also expected to flatten.

And yet, while the MYEFO did revise down the inflation figure used to calculate GDP (the GDP deflator) from 1.25 per cent to 1.0 per cent, it upped the expected level on inflation calculated by the consumer price index from 2.5 per cent to 2.75 per cent.

Now this is not necessarily sneaky. The two indices measure the same thing, but do it differently. However, if that GDP deflator measure turns out to be a bit pessimistic, then it is likely nominal GDP will be greater than anticipated. This is important because it is highly connected to revenue growth. The most recent GDP deflator growth was 1.3 per cent, and given overall expectations for inflation have increased since then, this alone might be a nice little bonus to the budget bottom line.

Where Hockey would also be looking for improvement is in the growth of wages. The MYEFO had wages growing by a mere 2.75 per cent in 2013-14. The most recent figures, however, have them even worse - a truly weak 2.65 per cent (the lowest recorded by the ABS since it started the wages price index in 1997). Hockey would actually like there to be a small increase on wages growth because that would increase the amount of income tax paid.

But on the employment front it is worth remembering that the outlook in the MYEFO was about as dire as you could get outside a recession.

The MYEFO predicted employment growth of a lousy 0.75 per cent in 2013-14. This is not only just about a third of the 10-year average of 2.1 per cent annual growth, but a mere half of the average annual growth in the past five years - a period that included the GFC:

Now there is no real indication that this might be a pessimistic figure, and it displays the difference between the budget situation and the economic one. There may be factors that occur that improve the budget bottom line - such as a greater than expected inflation - but that won't necessarily mean a better than expected economic position.

It's rather incongruous to be talking of cuts to government expenditure when the economy is barely limping along - especially when the MYEFO predicts annual employment growth over the following two years to only rise to 1.5 per cent. If Tony Abbott wants to achieve his promise of one million jobs in the first five years, he needs to average at least 1.7 per cent employment growth. So there's a bit of work to do on that front.

There are, however, some positive aspects. The MYEFO estimated the US economy would grow by only 2.5 per cent in 2013, and yet it grew by 2.7 per cent - more than the 2.5 per cent the MYEFO predicted it would grow by in 2014. Similarly, Japan was expected to grow by only 1.75 per cent in 2013, and yet the signs are that it will beat that quite easily (it grew by 2.4 per cent in the year to September 2013).

A stronger world economy will help exports and also lead to a better growth overall for us. But our main trading partner, China, continues to struggle (relatively speaking). In 2013 it grew by "only" 7.7 per cent, and MYEFO had it growing by just 7.5 per cent in 2014 - a figure in line with more economists' expectation, and possibly even more optimistic than some. If it turns out worse, expect that to hit the budget and the economy.

This all means that when the budget position is announced in May the thing to look for is how much any improvement this year and in future years is achieved due to ending the "age of entitlement" and how much came about due to the MYEFO predictions being overly pessimistic.

One thing you can guarantee, if the deficit is smaller, Hockey will claim personal credit. If it is worse, expect him (like Wayne Swan and every treasurer before him) to point to a worsening economic situation.

Greg Jericho writes weekly for The Drum. He tweets at @GrogsGamut. View his full profile here.